Strategic Asset Allocation and Commodities
The following is a report commissioned by PIMCO and done by Ibbotson Associates, Strategic Asset Allocation and Commodities :
This paper studies the role of commodities in a strateigc asset allocation. Commodities are real return, real assets that are part of the consumable/transformable super asset class and the store-of-value super asset class. There are several methods of obtaining exposure to commodities. This paper focuses on the type of exposure to commodities produced by a fully collaterized total commodity index.
The following table shows the historical correlation of commodities with various asset classes. As expected, commodities have negative correlation with equities and positive correlation with inflation.
The next figure shows the historical efficient frontier of a portfolio with and without commodities. Based on historical data, adding commodities increased returns without introducing additional volatility.
The paper also discusses the “forward-looking” efficient frontiers based on various models.
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